Queue Up! Early Stage VC Funding in China Has Legs
By Lynn Yoffee
BEIJING – You’re not in the circle if you’re not talking China. That’s one Chinese venture capitalist’s take on things. His colleagues were optimistic and confident, too, as they described the biopharmaceutical investment landscape in a panel focused on early stage VC funding at BIO’s Convention here Wednesday.
“I see a China premium not a China discount,” said Jonathan Wang, senior managing director, Orbimed Healthcare Fund Management.
Earlier this month Orbimed Advisors LLC closed a new fund of more than $735 million for investment in biopharmaceutical, medical device and diagnostics companies. Wang said $300 million of that is slated for Asia, with average target investments of $30 million per company.
Yi Shi, managing director of Lilly Asia Ventures, agreed, China is where it’s at.
“The name is misleading, it should be called Lilly China Ventures because all of our investments are in China,” Yi said. “We’ve looked at Korea, Japan, India and Taiwan, but we felt the bulk of opportunities are in China.” Lilly’s Fund I is $50 million and Fund II is $100 million; the typical investment size ranges from $5 million to $15 million.
Jimmy Zhang, managing director, MSD Early Investments – Greater China, chimed in when asked if there are early investment opportunities in China. “In the last 40 years, most pharmaceutical development here is generics. But more recently, there are a lot of returnees [launching new companies],” Zhang said. “There are no M&A opportunities yet, but for our venture investment arm, especially at the preclinical stage, there are plenty of opportunities.”
Zhang is responsible for those early investments – Phase II or earlier – via a $285 million fund.
The VCs then drilled down to the topic on the minds of most attendees at the meeting: innovation, and whether it can be found yet in China.
Wang noted that investors historically search for opportunities that are all about innovation. But in China, the golden key is attention to market needs.
“I see deals that focus on Asia-specific diseases such as gastric cancer and hepatitis C,” he said. “That’s a big difference. In the U.S., you think about worldwide market, but you don’t think about Asia-specific diseases. I see a focus on cost and the patient population.”
For those relatively early stage deals, what’s the valuation matrix, West vs. East?
Panel members said there are a lot of things in common. Market size, need, competition and data are all similar focal points. The difference is that, in China, the cost is lower so that changes the risk-benefit profile.
“I see companies trying to generate short-term revenues by selling generics,” Wang said. “That’s effectively lowering the risk. When you value the company you need to do a combination of the two.”
Yi said when the Lilly fund started in 2008 it was focused on growth capital investments and investors targeted preclinical-stage companies.
“We have to look earlier and earlier now. There are less growth capital opportunities,” Yi said. “There are not many very innovative innovations in China.”
So what does Lilly invest in?
Innovent Biologics Inc., of Suzhou, China, is a good example, he said. That 1-year-old biosimilars firm provides no target risk.
In August, Innovent and Adimab LLC, of Lebanon, N.H., inked a deal in which Adimab will apply its platform to identify a fully human therapeutic antibody for a target selected by Innovent, which will coordinate all initial product development, including manufacturing and clinical trials. Innovent will compensate Adimab for discovery and optimization of therapeutic leads, and Innovent will lead the development efforts, including cell line development, formulation, manufacturing and clinical trials.
Innovent got development and commercialization rights for China, with Adimab retaining rights for the U.S., Europe and Japan, with royalties paid by each party to the other for their respective territories.
“It’s an example of early stage investment that fits our strategy,” Yi said.
Should other companies want to get the same backing afforded Innovent, the panelists echoed a familiar mantra on how to set up in China: Don’t helicopter in and out. Have a local team.
“Many foreign companies are trying to enter China,” Wang said. “So far we haven’t invested in anything without a local presence in China.”
Yi said operating in China is complicated enough, “Be sure to put forth the best asset. Hire a CEO locally and let the guy do his job.” He added that though labor costs are low, those executives won’t come cheap.
Who Needs VC?
There is a lot of hype in China about government funding and life science parks offering a multitude of benefits to help new biopharmaceutical firms launch.
But the VCs said it really is just hype.
“The parks are competing for your business,” Yi said. But the benefits, like free rent and significant infrastructures, don’t last long, and the freebies come with strings.
Zhang said one of those strings can be control of licensing rights, meaning a company wouldn’t be able to out-license globally.
They were also quite candid about government funding.
“Grants are nice to have, but they don’t determine the success of a company,” Yi said. Besides, they are small and booby-trapped. “Local government invests for reasons, such as taking photos for PR opportunities. It’s a major distraction. We need to learn to avoid those traps.”
In the end, Zhang had one final observation about funding for early stage companies. He warned attendees about angel investors in China. Most are real estate moguls looking for investments.
“It’s called dumb money. Don’t take it.”
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